GOLDMAN SACHS: There's one big difference between Canada's crazy housing market and the US in 2007

A
woman walks past graffiti which reads, "KA-CHING" near
condominium buildings behind a lot of vacant land that is boarded
up in Toronto.Mark
Blinch/Reuters

Canada's housing market has been red-hot. On a national level,
home prices are up 14.22% versus a year ago and 76% since the
world began to emerge from the global financial crisis in March
2009, according to the Teranet-National
Bank House Price Index. Some local markets, like Hamilton and
Toronto, have seen prices soar more than 25% year-over-year.

The explosion in Canada's home prices has caused many to draw
parallels between it and the US housing market in 2007. However,
according to Goldman Sachs' Economics Research team of Marty
Young and Michael Cahill, "One important difference is with
respect to the mortgage lending standards prevailing in the two
times and places."

In 2007, US lending standards were loosening as home prices were
approaching their peak. But, in Canada, lending standards have
been tightening since the financial crisis. Canadian banking
regulators have been "reducing maximum LTV [loan-to-value]
ratios and amortization terms, and, more recently, Vancouver and
Toronto have introduced foreign buyer taxes to dampen house price
growth," write Young and Cahill. All of that has added up to a
default rate well below that of the US.

Goldman
Sachs

At least in part to slow down its runaway housing market,
the
Bank of Canada raised its benchmark interest rate 25 basis
points to 0.75% at its July meeting. By doing so, it became the
first major central bank — aside from the US Federal Reserve
— to raise rates following the financial crisis.

"The lower baseline mortgage default rates in Canada, combined
with stronger bank capitalization, suggest that a house price
decline in Canada of the magnitude experienced in the US during
2007-2011 would likely pose smaller systemic risks than were
realized in the US during the financial crisis period," Young and
Cahill conclude.